London buyers move to less desired areas in yield search
CENTRAL London office buildings considered riskier bets are commanding higher prices as a shortage of properties available to lease sends rents soaring.
Office buildings where leases are close to expiring rose 19.6pc in value in the year through June compared with a 14.9pc gain for the longest-leased workspaces, according to data compiled by Investment Property Databank. Rents jumped 10.4pc for properties with the shortest leases, compared with a 6.5pc increase for properties being occupied the longest, the London-based research firm said.
Buying properties with leases nearing their end is risky because tenants can move out, leaving the landlord without income. Yet, the amount of central-London workspace for rent is at its lowest in seven years, Deloitte Real Estate said in May, reducing the risk of vacancy even as rents rise. Investors including Blackstone, the world's biggest buyout firm, and London-based developer Workspace have been buying short-lease buildings to take advantage of the trend.
The gains for short-leased office space shows "growing occupier demand for space in London is encouraging investors to look for assets that they can actively manage to generate higher income returns upon tenant expiry," Phil Tily, a managing director at IPD, said in an e-mail.
The cost of leasing office space in central London has risen 8.5pc in the 12 months through June, almost twice the increase a year earlier, IPD said.
Workspace bought Vestry Street Studios, a converted warehouse in London's Shoreditch district, for £12.6m (€17m) in May. One of the main attractions was that the leases were close to expiring, chief executive Jamie Hopkins said in a June 4 call with analysts.
"We can get in there and quickly drive that rental model up," Hopkins said on the call.
Blackstone bought the Adelphi Building near London's Trafalgar Square last year for about £260m in part because a lease on half the building ended last summer. The New York-based buyout firm is spending about £30m refurbishing the property to attract tenants, occupancy services provider ISG said in March.
The IPD data compared the performance of the top 25pc of office properties by unexpired lease term with the samepcage where occupiers are closest to having the option of leaving.
Meanwhile office vacancy rates in Brazil's biggest cities are poised to keep climbing even after more than doubling during the past two years, according to the real estate investment company backed by billionaire Jorge Paulo Lemann.
"You'll still have relatively weak demand and lots of supply," Felipe Goes, chief executive officer of Sao Carlos Empreendimentos e Participacoes said. "We think vacancies will continue to rise."
Sao Carlos's rate rose to 7.6pc last quarter from 3pc a year earlier, Goes said. The figures for Sao Paulo, Brazil's biggest city, and Rio de Janeiro exceed 10pc, according to real estate firm CBRE Group Inc. New York's business districts are at 5pc to 10pc. A commercial construction boom is driving an oversupply of office space that isn't being absorbed completely the nation's economy forecast to expand at an annual rate of 1.3pc in 2014. Even more new buildings will come to market next year.
Sao Carlos is controlled by Lemann, Carlos Sicupira and Marcel Telles with a combined 54pc stake, (Bloomberg)